Should You Trade Futures Contracts, Stocks, Or Forex?
I have little doubt that the contents of this article will agitate a few people
, and infuriate even more. But I have sound reasons for writing on this topic and will try to make a case for the various choices I expound upon. Hopefully, my reasoning will resonate with a few people and perhaps turn a few heads. Needless to say, there are a wide range of investments being aggressively marketed to potential traders in the current economic environment. The average trader needs to be well-informed as to the potential risks, and potential rewards associated with the investment opportunities being offered.I think one of the most important issues, especially of late, is the issue of transparency in financial reporting. Both the stock market and futures markets are highly transparent exchanges with well-documented recordkeeping and long-standing procedures in trading. There are well-established trading and clearing procedures in these two types of exchanges that have evolved over decades of trading and now function in nearly seamless fashion, despite the number of fiduciaries involved with each individual transaction. To be sure, the procedural methodology in stock trading and futures trading are well-established and well documented through legal precedent and published in a manner that each investor should have a firm understanding of the risks and procedures involved in these two investment classes.
But the question is a bit more complicated than simple standardized procedures, as some investments lend themselves to specific types of trading while other classes of investments are better suited for different types of investing. For example, the pure speculator will probably lean towards futures contracts in his investment portfolio because of the high level of leverage and volatility futures contracts inherently possess. On the other hand, a conservative investor with a longer-term investment horizon might favor a blue-chip stocks as his favorite investment class. While there are instances where stock investing can be quite volatile, by and large stock investing is a more stable investment than their volatile cousin, the futures contract. The important point here is for the average investor to match his investment goals with a class of investments that will meet his needs and expectations. For example, an investor who prefers very volatile investments in hopes of making a tidy profit in a relatively short period of time probably shouldn't invest in blue chip stocks. While some erratic movement in blue-chip stocks is possible, they are generally fairly stodgy and methodical in price movement. On the other hand, another investor may truly enjoy the volatile price movement involved in trading oil futures, for example. Oil futures are often very volatile and it takes a steady and skilled hand to manage these investments profitably. Just the same, the potential for extraordinary profits over a short period of time is far more likely in oil futures than blue-chip stocks. I must add one caveat, though: the fact that volatility exists in a given investment class does not assure profit, it only assures movement and it is up to the individual investor to translate that movement into profit, as opposed to loss.
In recent years another investment class has appeared and it is called Forex. Opinions on the Forex market range from a wholehearted acceptance of the investment to some investors who are, to say the least, very wary of the Forex market. I trade the Forex market from time to time and have not encountered any of the alleged horror stories some investors claim occur. But I think it is important to note that the Forex market, as opposed to the stock and futures markets, has very little transparency. There is no exchange on which Forex pairs are essentially traded. The Forex market is a loose conglomeration of participating banks that clear Forex trades more or less independently. To date, the system has worked reasonably well and been free from any widespread accusations of fraud or wrongdoing. To my way of thinking though, the lack of transparency in the Forex market is something that needs to be rectified before I can wholeheartedly embrace the Forex trading system. Without standardized contracts, exchange oversight, and a centralized location the possibility for widespread problems simply outweighs the possible benefits the Forex system offers. I think at some point this need will be realized and the Forex system will develop a centralized exchange with standardized contracts as the public clamors for the uniformity common to all investment classes. But to date, the system is still a loose association of banks and financial institutions clearing the Forex trades.
To my way of thinking, I will stick with stocks and futures contracts and my trading until the Forex system advances to the point of uniformity. Of course, there are uniform currency futures available on the Chicago Mercantile exchange for those who are interested in trading currencies. On positive note, I have no doubt that the Forex markets will evolve into a more structured trading format in the near future.
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